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Aug. 1 — A sweeping plan presented to parliament to overhaul Luxembourg's corporate and personal
income tax could mean tax cuts for large businesses, increased business tax credits
and a stimulus for start-ups.

The
proposal, submitted to parliament for review July 26, would progressively reduce the corporate
income tax rate from 21 percent to 19 percent in 2017, and drop it to 18 percent in
2018. Companies with a registered seat in Luxembourg City, which imposes a municipal
business tax, would thus become subject to a consolidated tax rate of 27.08 percent
in 2017 and 26.01 percent in 2018.

In a step aimed at stimulating start-up companies and small businesses, the bill also
would pare down the corporate income tax rate from 20 percent to 15 percent for companies
with a taxable income under 25,000 euros ($27,923), with a resulting aggregate income
tax rate of 22.8 percent.

The bill also would increase complementary and global tax credits for investments,
and extends a tax credit for companies that hire unemployed individuals to 2019.

With some exceptions, most of the measures are expected to take effect Jan. 1, 2017,
and were part of the budget announced in February (42 TMIN, 3/3/16).

Approach Average

Antoine Badot, international tax partner at KPMG Luxembourg, told Bloomberg BNA that
the rate reductions indicate lawmakers are heeding developments in Belgium, the Netherlands
and the United Kingdom, which all have announced plans to pare their nominal rates.

“It's a clear sign from the Luxembourg government that they want to actually get closer
to the average of the neighboring countries and the OECD average,”
he said in a phone interview with Bloomberg BNA Aug. 1. Badot noted that Luxembourg's
21 percent rate is high compared to the average corporate tax rates for European Union
countries and those that subscribe to the Organization for Economic Cooperation and
Development convention. Even if low rates are not the only determining factor for
companies considering whether to invest and maintain operations, he said, “it's a
sign that Luxembourg does not want to stay behind in this respect.”

When placed against the background of EU initiatives to combat tax avoidance and the
OECD's action plan against base erosion and profit shifting, Badot said, the increased
investment in tax credits and rate reductions demonstrate that “while Luxembourg is
definitely willing to implement the EU Anti-Tax Avoidance Directive and play according
to the rules that have been set up at the OECD level, at the same time there is a
willingness to remain competitive within the environment within which we operate.”

Personally Liable

One of the measures expected to have the largest impact on corporate taxpayers is
a provision that makes directors, trustees and liquidators personally liable for VAT
debts, following nonpayment or noncompliance by the taxable persons under their administration
or management.

Georges Simon, tax lawyer at Loyens & Loeff Luxembourg, told Bloomberg BNA the broad
scope of the new VAT provision making directors and managers personally liable for
company VAT debts is especially striking. “It doesn't really say what the circumstances
are,” he told Bloomberg BNA in a phone-interview Aug. 1.

The draft bill establishes a “broader liability of managers in matters of VAT than
in direct tax matters,” he said. Similar provisions exist under Luxembourg law that
can hold managers liable for direct taxation debts but these are conditional upon
certain circumstances and upon wrongful conduct by managers, he said. Recent case
law has also helped clarify “what the managers have to do” to not be held liable,
he said.

However, based on the proposed wording of the VAT provision in the law, “it seems
that managers could be held liable without wrongful conduct,”
he said.

Simon added that the draft bill isn't definitive and that changes to the wording of
the VAT provision that more clearly defined the scope of the liability are likely.

Forward Losses

Simon also noted that there had been indications lawmakers would introduce volume
as well as time limits to carry forward losses. The percentage of losses incurred,
that taxpayers would be able to carry forward, would reportedly be set to 75 percent,
he said. He described the absence of such a volume limitation in the draft law as
“good news for corporate taxpayers in Luxembourg because such a limitation in percentage
would have probably been much more cumbersome than a limitation in the number of years,”
he said.

The bill—number 7020—also for the first time introduces a 17-year limit on carrying
forward losses accumulated after Dec. 31, 2016, for income tax and municipal business
tax purposes. Taxpayers will be able to indefinitely carry forward losses realized
prior to this date.

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